Odfjell SE

OSE:ODF

Earnings Call Transcript 2024-Q1

[Harald Fotland, executive]

Good morning, everyone, and welcome to the presentation of Odfjell's First Quarter Results. Before I start, please note that there is a Q&A tab on the right-hand side of your screen. Please use that tab if you have questions during our presentation. The agenda is -- follows a standard format. I will present the highlights. My colleague, Terje Iversen will take you through the financial figures, and then I will summarize this presentation with an operational review and market update and prospects.

Odjfell is today presenting the best financial result in our 110-year long history. This is, of course, a great inspiration for all of my more than 2,000 colleagues around the globe. The time charter earnings in Odjfell Tankers ended at USD 195 million, and this compares to $182 million in the fourth quarter of 2023. We delivered an EBIT of USD 89 million. This compares to $71 million in the previous quarter, and we delivered a record net result of USD 68 million. This net result adjusted for one-off items was USD 69 million, and this compares to $50 million in the previous quarter. The rates on our renewed contracts during the quarter were up 14% on average, and we renewed approximately 22% of the estimated contract volume. The net result contribution from Odfjell Terminals increased to USD 3.2 million, and this compares to USD 2.4 million in the fourth quarter. Also, our carbon intensity for the first quarter came in at 7.14%, and this is slightly better than what we observed in the fourth quarter.

During the quarter, Odjfell has taken delivery of one newbuilding on long-term time charter and we have also signed an agreement for one newbuilding to be owned by Odjfell. A further 4 newbuildings on long-term time charter were concluded in April, and these vessels are all scheduled to be delivered in 2026 and '27. This brings the total number of newbuildings on order to Odjfell to 16 vessels, and by that, 20% of the order book in our segment is for Odjfell account.

So this concludes the highlights and then I'll give the word to my colleague, Terje Iversen.

[Terje Iversen, executive]

Thank you, Harald. I will, as usual, start with the financials and the P&L this quarter. Starting with the time charter earnings, we saw that increased with $13 million to USD 195 million this quarter. Main reason, of course, we see an improved market. We see higher boat contract rates and also spot rates in this quarter. And at the same time, we also saw that we had higher spot volumes compared to contract volumes this quarter. And based on spot contracts normally give a higher rate, then also, of course, we see an increase in the time chart earnings on that background. Time chart expenses under the $2.7 billion compared to $5.3 billion in the fourth quarter. Reason for the decline is that we redelivered 2 vessels on short-term time charters during the quarter.

Operating expenses ended at $49.1 million compared to $50.6 million. It's a bit on the lower end this quarter, I would say. We had some positive deviations due to insurance claims that were reversed this quarter. And we also have some lower activity on the dry docking side for our fleet also then leading to a slight decrease in operating expenses. Share of net results from associates and joint ventures being the results from our terminal investments ended at USD 3.2 million. And actually, that is the highest contribution from Odjfell Terminals since we did the restructuring of the Terminal division back in 2016, 2017. And it's also a pleasure to see that all the Terminals are delivering improved results this quarter, done substating the substantial increase in the results that we have seen from that division in several quarters now.

G&A ended at $19.3 million were comparable to the previous quarter at $19.4 million. And then we delivered an EBITDA of USD 126.8 million compared to $108.7 million in the quarter. Depreciation, $38.3 million, very much the same as previous quarter, led to an EBIT of USD 89 million compared to $71 million in the fourth quarter. Net interest expenses continue to decline. The reason for that is, of course, that we are decreasing the debt on our balance sheet. So we ended at USD 19 million this quarter. And after other financial items in Texas, we delivered a net result of USD 67.8 million compared to $52.1 million in the fourth quarter of '23. That gives an earnings per share of $0.86 and as you see from the table here, we also delivered commercial revenue days in accordance with what we delivered in the fourth quarter.

But we saw a decline in off-hire days, leading to more -- a slight increase in commercial days. Looking at the time charter per day, we saw a substantial increase in that under the USD 33,000 compared to $31,000 in the fourth quarter. We also saw a positive development in the cash breakeven, which ended at $22,500 compared to around $24,000 in the fourth quarter, bringing the 12 months rolling average to around $23,200 per day. Main reason for the decline in cash breakeven quarter was to -- that we had lower operating expenses and also lower time charter expenses as I alluded to, and also that we had lower dry docking activity this quarter compared to previous quarters.

Going forward, we expect cash breakeven to remain around these levels, even though we are still striving to come closer to our cash breakeven target around USD 20,000 per day. The balance sheet, not that much development on that. We saw that we took delivery of one time start vessels, Bow Lynx that is leading to increase in right of use of assets this quarter compared to previous quarter. We see that cash and cash equivalents decreased to USD 87 million. And if you include undrawn loan facilities, we ended at USD 152 million available cash and liquidity. And we also had to consider that we paid out around USD 50 million in dividend during this quarter based on the results in the second half 2023. Equity is continuing to increase. We have no equity ratio adjusted for IFRS 16 commitments at around 48%, up 2% compared to end of last year.

On the debt side, we did some extraordinary repayments of debt, leading to a continued decrease in our noncurrent interest-bearing debt. And we also see that we, this quarter, reclassified the bond that matures in January 2025 from noncurrent interest-bearing debt to current portion of interest-bearing debt. The cash flow this quarter, we saw operating cash flow at $90.7 million compared to $101.4 million in the fourth quarter. The increase that was -- the decline was then led by the working capital that we saw this quarter, where we had a negative change in working capital of $12.9 million compared to positive change in working capital of $14.4 million in the fourth quarter. Reason for the change in working capital negative this quarter was mainly due to the effect that we saw an increase in the revenue throughout the quarter, towards the end of the quarter and also the fact that the capital -- the working capital is varying from quarter-to-quarter or for month-to-month.

On investment activities, not too much to talk about. We did investments related to dry docking activities around USD 8 million. And on the debt side, as I said, we did some extraordinary debt repayments of USD 25 million, in addition to $17 million in scheduled debt installments this quarter. And we paid a dividend of USD 49.7 million in February. Looking at the cash flow on a more long-term basis, we see that we continue to increase -- deliver increased free cash flow from the business. This quarter, we had operating cash flow of USD 91 million. And after investment of USD 9 million, we had a free cash flow of USD 82 million compared to $64 million in the preceding quarter. Also, 12 months rolling free cash flow is continuing to increase under the $87 million this quarter. And also, if you adjust for repayments related to the right of use of assets, it reached USD 71 million this quarter.

Going forward, of course, we have some CapEx commitments to the new building that we have ordered as Harald alluded to and we also have some CapEx commitments related to the purchase options that we now have exercised. In total, USD 118 milion. The first purchase option will be delivered in December of this year, while the second will be delivered in July 2025. And I must add that both these purchase options are quite favorable. And we expect to gear -- have a quite high gearing, meaning that we are going to borrow 100% of the purchase price for these 2 vessels. And the fact that this will not impact the free cash flow to equity in any material way.

This is an overview of the debt maturity going forward. We did a refinancing in this quarter of 6 vessels in total. I must say we did that on quite favorable terms, leading to the lowest margin that we have seen for a very long time. And also due to the refinancing, we are decreasing the cash breakeven for those vessels included in that facility with around $1,700 per day and also increasing the undrawn per group at around USD 26 million. And also, as we alluded to in the last quarter, this refinancing, including the first-of-its-kind, Transition Finance tranche that we presented in the last quarter. We did some extraordinary debt repayments and we have available undrawn funds totaled USD 91 million per end of April. We are considering to refinance some maturities early going forward to reduce the debt further and also to improve the terms on this financing.

We have a bond maturing in January 2025. We haven't decided yet what to do with that based on the earnings that we see today, based on the balance sheet we have, we will be able to just repay that with cash on our balance sheet, but we may also consider to go to the market if we find that favorable for us. On the debt maturities on the lower part of this presentation, we see that we have estimated that end of this year at USD 784 million which is somewhat lower than we presented last quarter. And end of fourth quarter 2026, we expect to be around USD 600 million in debt -- interest-bearing debt at that time. Of course, depending on the earnings and what we decided to do on an investment side in that period.

I think that leaves my presentation. And over to you again, Harald.

[Harald Fotland, executive]

Thank you, Terje. I will then continue with our operational review. The rates increased during the first quarter, and this was mainly driven by the trade flow disruptions on top of an already tight market balance. The ODFIX index was up 6.8% during the quarter, and this relates to an increase of 12.8% for the Clarksons Chemical Tanker Spot earnings. We have touched upon a couple of times that vessels are being rerouted and the graph on your right shows the transits of chemical tankers and product tankers through Gulf of Aden. And since December, there has been a sharp decline. And today, somewhere between 0.3 million and 0.4 million tonnes of chemical tankers are transiting the Gulf of Aden on a weekly basis. It's also important to notice that as far as we understand, none of our direct competitors have been transiting Gulf of Aden during this quarter.

The first quarter was an active quarter for contract renewals, and we continue to increase our rates. We renewed 22% of our existing contracts during the quarter, and the average rate increase was around 14%. And these figures also include contracts where customers have exercised their option periods with rates rolled over at or around existing levels. And since the market upswing started, the contract rates are on average up around 30%. We saw, as Terje mentioned, a reduction in our total volumes being transported during the first quarter, and this is due to the longer sailing distance from the rerouting of vessels away from the Suez Canal and also, to some extent, from the Panama Canal. The contract volumes fell quarter-on-quarter, while we saw some upswing in our spot volumes. The contract coverage in the first quarter came in at 59%, measured against the total volumes.

Carbon intensity, the Odjfell's carbon intensity was within our targets also in this quarter. We report an AER of 7.14, which is slightly lower than the average that we saw for the full year 2023. We have also, as Terje mentioned, launched a Transition Finance Framework. And these funds will be used to finance our decarbonization projects going forward. The testing of air-lubrication on board of vessel, Bow Summer is ongoing and the final test is scheduled to commence later this month. The installation of suction sails on Bow Olympus is slightly delayed to the first quarter of 2025, the reason for that is a postponed dry docking. And by that, later arrival in Europe where the installation will take place.

Then turning to Odjfell Terminals. The average commercial occupancy rate at our Antwerp terminal was 100% during the quarter. And we also saw that the Ulsan terminal experienced a quarter-on-quarter increase in occupancy. We saw a slight reduction in commercial occupancy at our U.S. terminals during the first quarter, and this is partly related to the commissioning of more than 32,000 cubic meters of new tank capacity at our terminal in Houston. Our terminals continue to perform well with an average occupancy rate at almost 97% in the quarter. This is in line with the previous quarter. Higher shipping costs due to the deviation away from the Panama Canal has, to some extent, reduced imports and exports between Korea and the U.S. And this, in combination with a reduction in end-consumer demand in certain regions has resulted in a moderate reduction in activity levels at our terminals compared to the mid '23.

However, the prospect of a macroeconomic "soft landing" globally can indicate an upside to activity levels for the second half of 2024. Then to the market update and our prospects going forward. Starting with the markets west of Suez, and we saw a stabilizing of spot rates west of Suez throughout the quarter, but also with an upswing in the U.S. Gulf to Europe trade lane during the quarter. The situations in Panama and the Suez canals are contributed to limited tonnage supply in the Atlantic basin. The picture was slightly better in east of Suez, where we saw spot rate increases throughout the quarter. The rates for the Middle East export trade lane to Europe increased the most, while rates Middle East to Far-East were stable. Here, we also have to take into account that the Middle East Europe trade lane is the trade lane that perhaps is most affected by the deviation away from the Suez Canal.

Total chemical volumes were stable in the quarter. And we now see that the influx of swing tonnage is less than 3% of the total product tanker fleet, meaning that more or less only [ Alma ] tonnage that has traditionally sailed all the time within chemicals, are those being left in our segment. Order book remains at low levels. During the quarter, we have seen some new additions of orders for super-segregators. The order book today is around 7.2% of the total fleet. And approximately 2% of that order book is scheduled to be delivered in 2024. It's also important to notice that approximately 20% of the total order book are vessels for Odjfell account. Trade flow disruptions are likely to continue into the second half of 2024, and this will limit supply in an already tight market.

Geopolitical tension, particularly the situation in the Red Sea will continue to affect our markets. We also see a forecasted increase in GDP of approximately 3.1% in the global economy and we are foreseeing a soft landing. We also see positive figures, both from the U.S., from India and partly also from China. On top of that, we see that parts of the value chain are currently having low inventories, and this indicates that the destocking of the pandemic and inventory build-up may now be coming to an end. All in all, the global chemical production is predicted to grow by approximately 3% in 2024 after moving sideways in 2023.

So all in all, we have a positive demand outlook with growth in production and continued high demand for ton mile production. While we, on the supply side, see a stable development with limited new orders. We see swing tonnage remaining in CPP, and we continue to see that older tonnage is leaving our core trades.

To summarize this presentation, Odjfell achieved a record result in the first quarter with strong markets and a very good operational performance. The time charter earnings for Odjfell Tankers increased significantly in the first quarter as the rerouting of vessels away from the Red Sea has elevated freight rates further. The net result contribution from Odjfell Terminals increased in the first quarter as new capacity came on stream, both in Antwerp and in Houston. Market outlook, we expect steady growth in demand and limited new supply. The net growth forecasted for 2024 is around 2% of the total fleet. The current situation in Red Sea remains dangerous and uncertain, and we continue to increase the rates for our contract portfolio. And by that, we expect stable result contribution from Odjfell Terminals in the coming quarter. In sum, we expect our earnings to increase further in 2024 -- in the second quarter of 2024.

Before we turn to the Q&A session, I would like to remind you that on Monday, the 13th of May, the coming Monday, Odjfell will arrange our Capital Market Day in Oslo at the Hotel Continental. I hope to see many of you there. And if you would like to attend and please send an e-mail to the e-mail address that you see on the screen right now. So we turn to the Q&A session, and I'm curious to see whether anyone has questions for us today.

[Nils Selvik, executive]

So we have a few questions that have come in during the presentation. And I think we can say that there are a couple for each of you, and I'll start with the first one to you, Harald. And it is just a question concerning the volumes and the -- you mentioned it in your presentation, but volumes are slightly down compared to last quarter, and this relates to the longer sailing distance that we have seen during this quarter. Do we expect this to level out for the coming quarter? Or can we expect further decrease related to the sailing distance?

[Harald Fotland, executive]

Well, I think my first observation when it comes to our total volumes is that the decrease has been less than what we anticipated when we started to reroute vessels away from Gulf of Aden and the Suez Canal. So that takes away 6%, 7% of the total capacity, but we haven't seen that high reduction in our total volumes lifted. So -- and that indicates that we become even better in utilizing the capacity of our ships. Now we see that the capacity is in Panama is slightly coming back. So we will not see further reductions in volumes for the coming quarter.

[Nils Selvik, executive]

Next one goes to you, Terje. And I think this is a question that we have gotten before, and it's related to given the low financial leverage you currently have, can we expect higher dividend payout ratio going forward or share buybacks?

[Terje Iversen, executive]

That's a good question. Up until now, our final strategy has been about capturing the short term and derisk the long term. At the same time, we announced the dividend policy, I think, 2 years back saying that we want to return 50% of the net results of our shareholders. And we have done that, and that has been well received, I must say, going forward, of course, we see that our balance sheet is strengthening. At the same time, you see that the cash breakeven, we are not at the target yet. I would love to be closer to that target, but that could be challenging. But at the same time, we want to keep and continue to strengthen our balance sheet and also building investment capacity for the future. As we have said, we are extending or expanding our fleet, mostly through time charter, doing the expansion on a capital-light way. But at some stage, we would also like to invest in our own fleets and build capacity to do that. So up until we decide otherwise, we continue, I think, on our strategy to capture the short term and derisk the long term.

[Nils Selvik, executive]

Next question is for you, Harald. And I guess on the subject of ordering ships, we did order one vessel for our own account or directly during the quarter. And the question is, why did you order a single ship and not a series?

[Harald Fotland, executive]

Well, that particular vessel is a 25,000 tonne that is being built in China, delivery expected during first half of 2027. And then this vessel has been ordered for replacement of -- in our fleet for [indiscernible] operation on the East Coast of South America. So this is one vessel that is dedicated for one specific trade in South America.

[Nils Selvik, executive]

Thank you. I actually think that was the final question. So with that, the Q&A is concluded.

[Harald Fotland, executive]

Thank you. And thank you all for listening, and I hope to see as many as possible of you on Monday next week. Have a nice day.